Hello,

I just got my practice final for my accounting theory class (really just a bunch of finance problems), and I don't know how to solve single problem.

I'm incredibly frustrated as our professor is horrible and i'm normally a straight A student - so if anyone knows how to figure out any of the attached questions that would be so helpful!! I have a feeling they're probably pretty straightforward, which makes it all the more frustrating.

Question 1 (8 points) A new firm announces that it will invest $150 million in projects each year forever. All projects are expected to generate a 15% rate of return on the beginning-of-year book value for each year for five years. The required rate for this project is 12%. The firms uses a straight line depreciation over the life of the investment. a What is the value of the firms? (Show calculation and explain). (6 points) b. What is the value added over and above the initial investment? Explain why it may be more (less) than the 15% annual rate of return. (2 points) Question 2 (8 points) Consider the following per-share numbers from the accounting reports of a firm 2011 2012 2013 2014 Book Value (end of year) 200 207 230 238 Dividends (end of year) 15 15 You have reasons to believe that at 2014, the firm has reached a steady state of operation. Your opportunity cost of capital is 10%. a. If you paid $220 for the share at the beginning of 2011, with the benefit of hindsight, did you overpay or underpay? Explain. (6 points) b. How much should you expect to sell this share for at the end of 2014? Explain. (2 points)Question 3 (8 points) Consider the following per-share numbers from the accounting reports of a firm for 2011 and its forecasts 2011 2012 2013 2014 2015 Book Value (end of year) 200 Dividends (end of year) 15 15 15 Earnings 22 23 23 23.8 The firm is expected to reach a steady state after 2015. Your opportunity cost of capital is 10%. a. How much should you pay for this firm in 2011, based on its earnings and earnings growth? (6 points) b. What do you expect to be price of this share at the end of 2015? Explain. (2 points) Question 4 (8 points) a. It is often believed that analysts' forecasts ex-dividend earnings-per-share growth. Do you agree that it is a proper way to forecast earnings? What other information you would seek and why? Explain. (3 points) b. What is the difference between the forward P/E ratio and the trailing P/E ratio? Explain why you may want to use one or the other. (3 points) c. What is the P/E ratio of a bond? How do you explain it? (2 points)